COMMISSION FILE NUMBER 0-25734; 1-13684
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![[dmn06300410q001.gif]](dmn06300410q001.gif)
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DIMON Incorporated
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Incorporated under the laws of
| I.R.S. Employer
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VIRGINIA
| Identification No. 54-1746567
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512 Bridge Street, Danville, Virginia 24541
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Telephone Number (434) 792-7511
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
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As of July 30, 2004, the registrant had 45,161,954 shares outstanding of Common Stock (no par value).
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| | Part I. Financial Information
Item 1. Financial Statements
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| | DIMON Incorporated and Subsidiaries
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| | STATEMENT OF CONSOLIDATED INCOME
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| | Three Months Ended June 30, 2004 and 2003
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| | (Unaudited)
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| | | | June 30,
| | June 30,
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| | | | 2004
| | 2003
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| | (in thousands, except per share amounts)
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| | Sales and other operating revenues
| | $299,670
| | $364,479
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| | Cost of goods and services sold
| | 246,363
| | 295,686
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| | Gross profit
| | 53,307
| | 68,793
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| | Selling, administrative and general expenses
| | 30,007
| | 38,273
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| | Other income
| | (1,895)
| | -
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| | Restructuring and asset impairment charges
| | 675
| | -
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| | Operating income
| | 24,520
| | 30,520
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| | Interest expense
| | 12,102
| | 12,619
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| | Interest income
| | 929
| | 476
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| | Derivative financial instruments (income)/expense
| | (6,131)
| | 2,038
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| | Income before income taxes, equity in net income of investee companies,
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| | minority interests and extraordinary item
| | 19,478
| | 16,339
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| | Income tax expense
| | 6,428
| | 4,862
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| | Income before equity in net income of investee companies, minority
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| | interests and extraordinary item
| | 13,050
| | 11,477
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| | Equity in net income of investee companies
| | 89
| | 520
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| | Minority interests (income)
| | (235)
| | (283)
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| | Net income before extraordinary item
| | 13,374
| | 12,280
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| | Extraordinary item – Iraqi receivable recovery, net of $957 income tax
| | -
| | 1,777
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| | Net income
| | $ 13,374
| | $ 14,057
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| | Basic earnings per share
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| | Net income before extraordinary item
| | $.30
| | $.28
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| | Extraordinary item – Iraqi receivable recovery
| | -
| | .04
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| | Net income
| | $.30
| | $.32
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| | Diluted earnings per share
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| | Net income before extraordinary item
| | $.29
| | $.27
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| | Extraordinary item – Iraqi receivable recovery
| | -
| | .04
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| | Net income
| | $.29
| | $.31
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| | Average number of shares outstanding:
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| | Basic
| | 44,846
| | 44,537
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| | Diluted
| | 48,004
| | 47,660
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| | Cash dividends per share
| | $.075
| | $.075
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| | See notes to consolidated financial statements
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| | -3-
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DIMON
Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEET
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June 30,
2004
(Unaudited)
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June 30,
2003
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March 31,
2004
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(in thousands)
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$ 155,837
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$ 88,932
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$ 18,819
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Notes
receivable
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6,153
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2,619
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5,658
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Trade
receivables, net of allowances
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125,460
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179,532
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198,158
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Inventories:
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Tobacco
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611,051
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464,360
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462,008
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Other
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52,750
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24,747
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46,284
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Advances
on purchases of tobacco
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57,032
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40,748
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90,633
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Current
deferred and recoverable income taxes
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14,350
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11,349
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14,179
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Prepaid
expenses and other assets
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25,687
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27,481
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27,881
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Total
current assets
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1,048,320
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839,768
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863,620
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Investments
and other assets
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Equity
in net assets of investee companies
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918
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6,061
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829
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Other
investments
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2,496
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2,919
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2,699
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Notes
receivable
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2,925
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3,832
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3,004
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Other
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44,256
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37,856
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25,257
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50,595
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50,668
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31,789
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Goodwill and intangible
assets
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Goodwill
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151,772
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151,772
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151,772
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Production
and supply contracts
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9,825
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12,543
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10,479
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Pension
asset
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1,934
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2,002
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1,934
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163,531
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166,317
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164,185
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Property,
plant and equipment
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Land
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19,887
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19,902
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20,415
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Buildings
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188,859
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187,926
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193,611
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Machinery
and equipment
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201,281
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203,061
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202,737
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Allowances
for depreciation
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(175,057)
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(158,394)
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(176,655)
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234,970
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252,495
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240,108
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Deferred taxes and other
deferred charges
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56,472
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43,904
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57,702
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$1,553,888
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$1,353,152
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$1,357,404
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See notes to consolidated
financial statements
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-4-
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DIMON Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEET
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| | | June 30,
2004
(Unaudited)
| | June 30,
2003
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March 31,
2004
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(in thousands)
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities
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Notes payable to banks
| $ 406,401
| | $ 210,162
| | $ 243,655
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Accounts payable:
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Trade
| 43,051
| | 53,394
| | 48,256
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Officers and employees
| 6,565
| | 10,521
| | 5,790
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Other
| 9,854
| | 9,602
| | 18,518
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Advances from customers
| 121,775
| | 75,119
| | 79,905
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Accrued expenses
| 30,527
| | 28,275
| | 33,018
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Income taxes
| 10,268
| | 14,926
| | 12,519
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Long-term debt current
| 3,106
| | 1,225
| | 2,976
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Total current liabilities
| 631,547
| | 403,224
| | 444,637
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Long-term debt
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Revolving Credit Notes and Other
| 15,241
| | 10,250
| | 11,883
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Convertible Subordinated Debentures
| 73,328
| | 73,328
| | 73,328
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Senior Notes (net of fair value adjustment of
$(10,002) at June 30, 2004, $16,319 at June 30, 2003
and $10,798 at March 31, 2004)
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314,998
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341,319
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335,798
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| 403,567
| | 424,897
| | 421,009
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Other long-term liabilities:
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Income taxes
| 6,831
| | 4,128
| | 5,068
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Compensation and other
| 87,234
| | 65,252
| | 70,691
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| 94,065
| | 69,380
| | 75,759
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Minority interest in subsidiaries
| 877
| | 1,078
| | 1,114
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Commitments and contingencies
| -
| | -
| | -
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DIMON
Incorporated and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months Ended June 30, 2004 and 2003
(Unaudited)
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June
30,
2004
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June
30,
2003
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(in thousands)
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Operating activities
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Net
income
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$ 13,374
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$ 14,057
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Adjustments
to reconcile net income
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to
net cash provided (used) by operating activities:
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Depreciation
and amortization
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8,770
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10,464
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Deferred
items
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(1,712)
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(3,359)
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(Gain)
loss on foreign currency transactions
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(187)
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2,275
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Changes
in operating assets and liabilities
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(34,664)
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14,668
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Net
cash provided (used) by operating activities
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(14,419)
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38,105
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Investing activities
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Purchase
of property and equipment
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(3,450)
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(12,424)
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Proceeds
from sale of property and equipment
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2,108
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87
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Payments
received (advances) on notes receivable and
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receivable
from investees
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(651)
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473
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Purchases
of equity in net assets of investee
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-
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(5,000)
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Payments
for other investments and other assets
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(7,629)
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(264)
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Net
cash used by investing activities
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(9,622)
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(17,128)
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Financing activities
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Net
change in short-term borrowings
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164,547
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58,380
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Proceeds
from long-term borrowings
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25,763
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126,168
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Repayment
of long-term borrowings
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(25,550)
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(130,305)
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Proceeds
from sale of stock
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51
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-
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Debt
issuance cost
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(386)
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(2,631)
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Cash
dividends paid to DIMON Incorporated stockholders
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(3,387)
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(3,355)
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Net
cash provided by financing activities
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161,038
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48,257
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Effect of exchange rate
changes on cash
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21
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(142)
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Increase in cash and
cash equivalents
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137,018
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69,092
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Cash and cash equivalents
at beginning of year
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18,819
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19,840
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Cash
and cash equivalents at end of period
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$155,837
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$ 88,932
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See notes to consolidated
financial statements
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-6-
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DIMON Incorporated
and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
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1.
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BASIS OF PRESENTATION
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The accompanying
interim unaudited consolidated financial statements of DIMON Incorporated
and Subsidiaries (the “Company” or “DIMON”) include
all normal recurring adjustments necessary for a fair presentation. Certain
prior period amounts have been reclassified to conform to the current
period presentation. For additional information regarding accounting
principles and other financial data, see Notes to Consolidated Financial
Statements in the Annual Report on Form 10-K for the fiscal year ended
March 31, 2004. The Company’s operations are seasonal. Therefore,
the results of operations for the three months ended June 30, 2004 are
not necessarily indicative of the results to be expected for the year
ending March 31, 2005.
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On June
23, 2003, the Board of Directors adopted a change in fiscal year end from
June 30 to March 31. The primary purpose of the change was to better
match the financial reporting cycle with natural global crop cycles for
leaf tobacco. As a result of this change, the Company had a nine
month transition year ending March 31, 2004. The new fiscal year
commenced April 1, 2004.
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Beginning
with the quarter ended June 30, 2004, the Company has revised its presentation
of sales relating to the provision of crop materials to its contracted
growers. Previously, the Company recognized revenue and cost of
sales in connection with the sale of fertilizer and other crop materials
to growers. In light of the increased materiality of such
sales in the current year, the Company reviewed its revenue recognition
policy related to these sales and determined that it was not appropriate
to recognize revenue on these transactions and has revised sales and cost
of sales for the quarter ended June 30, 2003. Previously reported
sales and cost of sales totaled $393,138 and $324,345, respectively, for
the quarter ended June 30, 2003. This revised presentation had the
effect of reducing sales and cost of sales by approximately $28,659 for
the quarter ended June 30, 2003. The revision had no effect on net
income, financial position or cash flows previously reported.
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2.
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EARNINGS PER SHARE
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Basic earnings
per share are computed by dividing earnings by the weighted average number
of common shares outstanding. The diluted earnings per share calculation
assumes that all of the Convertible Subordinated Debentures outstanding
during the periods presented were converted into Common Stock at the beginning
of the reporting period, or as of the date of issue, thereby increasing
the weighted average number of shares considered outstanding during each
period and reducing the after-tax interest expense. The weighted
average number of shares outstanding are further increased by common stock
equivalents on employee stock options and restricted shares outstanding.
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For the
three months ended June 30, 2004 and 2003 certain potentially dilutive
options outstanding were not included in the computation of earnings per
diluted share because their exercise prices were greater than the average
market price of the common shares during the period, and accordingly,
their effect is antidilutive. These shares totaled 2,347 at a weighted
average exercise price of $12.85 per share for the three months ended
June 30, 2004, and 2,032 shares at a weighted average exercise price of
$14.41 per share for the three months ended June 30, 2003.
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The following
information reconciles basic earnings per share to diluted earnings per
share.
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Three Months
Ended
June 30,
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(in thousands, except
per share amounts)
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2004
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2003
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Basic earnings per share
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Income
before extraordinary item
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$13,374
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$12,280
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Extraordinary
item – Iraqi receivable recovery
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-
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1,777
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Net
income
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$13,374
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$14,057
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Shares
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Weighted
average shares outstanding
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44,846
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44,537
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Basic earnings per share
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Income
before extraordinary item
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$.30
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$.28
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Extraordinary
item – Iraqi receivable recovery
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-
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.04
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Net
income
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$.30
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$.32
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-7-
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DIMON Incorporated and
Subsidiaries
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2.
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EARNINGS PER SHARE (Continued)
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Three Months
Ended
June 30,
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(in thousands, except
per share amounts)
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2004
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2003
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Diluted earnings per
share
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Income
before extraordinary item
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$13,374
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$12,280
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Extraordinary
item – Iraqi receivable recovery
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-
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1,777
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Net
income
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13,374
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14,057
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Add
after-tax interest expense applicable to 6.25% Convertible Debentures
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issued
April 1, 1997
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745
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745
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Net
income as adjusted
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$14,119
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$14,802
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Shares
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Weighted
average shares outstanding
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44,846
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44,537
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Restricted
shares issued and shares applicable to stock options, net of shares
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assumed
to be purchased from proceeds at average market price
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609
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574
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Effect
of conversion of 6.25% Debentures at beginning of period
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2,549
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2,549
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Average
diluted shares outstanding
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48,004
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47,660
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Diluted earnings per
share
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Income
before extraordinary item
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$.29
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$.27
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Extraordinary
item – Iraqi receivable recovery
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-
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.04
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Net
income as adjusted
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$.29
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$.31
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3.
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COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
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Three Months
Ended
June 30,
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2004
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2003
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Net income
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$13,374
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$14,057
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Equity currency conversion
adjustment
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(846)
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4,330
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Derivative financial
instruments, net of tax of $(222) and $865 for the three months
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(429)
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1,761
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Minimum pension liability,
net of tax of $(1,111) for the three months
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-
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(1,745)
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Total comprehensive income
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$12,099
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$18,403
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-8-
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DIMON Incorporated and Subsidiaries
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6.
| CONTINGENCIES
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| | In May 2004, the Company received from Brazilian tax officials notices of proposed adjustments to income tax returns for the Company’s Brazil operations for tax years 1999 through 2002, inclusive, that total $44,400. Of these proposed adjustments $33,400 relates to disallowance of local currency foreign exchange losses on U.S. dollar funding. The other $11,000 relates to disallowance of other sales related expenses. The Company believes it has strong defenses to these adjustments.
|
| | In 1993 and 1996, the Company received notices from Brazilian tax authorities of proposed adjustments to the income tax returns of the Company’s entities located in Brazil for the calendar years ending 1988 through 1992. The Company has successfully defeated many of the proposed adjustments in litigation and settled the other issues under REFIS and Tax Amnesty programs. As of June 30, 2004, total tax, penalties and interest relating to still unresolved issues is approximately $1,400.
|
| | On October 31, 2002, the Company received an assessment from the tax authorities in Germany regarding the taxable gain from the sale of its flower operations, Florimex, in September 1998. The report concluded the values of the real estate located in Germany were greater than those arrived at with the buyer of the flower operation. The proposed adjustment to income tax, including interest, is equivalent to approximately $5,100 for federal corporate income tax and $2,900 for local trade income tax. The Company has challenged this finding with valuations that support the values used in the original filings and is currently discussing the issue with the tax officials in Germany. It is possible these issues will not be resolvable at the administrative level and must be taken to tax court.
|
| | In September 2002 and in January 2004, the Company’s Tanzanian operation received assessments for income taxes equivalent to approximately $1,000 and $5,300, respectively. The Company has filed protests and appeals and is currently awaiting replies.
|
| | The Company believes it has properly reported its income and paid its taxes in Brazil, Germany and Tanzania in accordance with applicable laws and intends to vigorously contest the proposed adjustments. The Company expects the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated balance sheet or results of operations.
|
| | In October 2001, the Directorate General for Competition (DGCOMP) of the European Commission (EC) began conducting an administrative investigation into certain tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in Spain and Italy. The Company believes that the DGCOMP may be conducting similar investigations in other countries. Its subsidiaries in Spain (Agroexpansion) and Italy (DIMON Italia) are cooperating with the DGCOMP. Based on its understanding of the facts pertaining to the activities of Spanish and Italian tobacco processors, including Agroexpansion and DIMON Italia, respectively, the Company believes there have been infringements of EU law. Agroexpansion and DIMON Italia believe that there are mitigating circumstances in the structure and
traditional operation of tobacco production and processing in these markets. In December 2003 and February 2004, the EC issued Statements of Objections (“the Statements”) relating to buying practices in Spain and Italy, respectively. The Statements allege that the buying practices of the tobacco processors and producers in Spain and Italy constitute infringements of EU competition laws. The Statements indicated that the EC intends to assess administrative penalties, but did not provide any indication as to what those penalties may be. Both Agroexpansion and DIMON Italia have filed a response to the Statements of Objections relating to Spain and Italy, respectively. The EU conducted oral hearings on the Spanish matter and the Italian matter during March and June, 2004, respectively. Although it is impossible to assess the amount of any penalties at this time, they could be material to the Company’s earnings. The Company believes that the cooperation of
its subsidiaries with the DGCOMP during its investigations could result in a reduction of the amount of any penalties that otherwise could be imposed.
|
| | In March 2004, the Company discovered potential irregularities with respect to certain bank accounts in two countries in southern Europe and central Asia. The Audit Committee of the Company’s Board of Directors engaged an outside law firm to conduct an investigation of activity relating to these accounts. That investigation revealed that, although the amounts involved were not material and had no material impact on the Company’s historical financial statements, there have been payments from these accounts that may have violated the U.S. Foreign Corrupt Practices Act. The Company voluntarily reported the payments to the appropriate U.S. authorities. The Company has closed the accounts in question and is implementing personnel changes and other measures designed to prevent similar si
tuations in the future, including the addition of new finance and internal audit staff in Europe and enhancement of existing training programs.
|
| If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, they may seek to impose sanctions on the Company that may include injunctive relief, disgorgement, fines, penalties and modifications to business practices. It is not possible to predict at this time whether the authorities will determine that violations have occurred, and if they do, what sanctions they might seek to impose. It is also not possible to predict how the government’s investigation or any resulting sanctions may impact the Company’s business, results of operations or financial performance, although any monetary penalty assessed may be material to its results of operations in the quarter in which it is imposed. The Company will continue to cooperate with the authorities in these matters.
|
| | |
| |
| | -10-
|
| | |
|
DIMON Incorporated and
Subsidiaries
|
|
|
| |
|
|
6.
|
CONTINGENCIES (Continued)
|
| |
|
| |
The
Company and certain of its foreign subsidiaries guarantee bank loans to
growers to finance their crop. Under longer-term arrangements, the
Company may also guarantee financing on growers’ construction of
curing barns or other tobacco production assets. The Company also
guarantees bank loans to certain tobacco cooperatives to assist with the
financing of their growers’ crops. Guaranteed loans are generally
repaid concurrent with the delivery of tobacco to the Company. The
Company is obligated to repay any guaranteed loan should the grower or
tobacco cooperative default. If default occurs, the Company has
recourse against the grower or cooperative. At June 30, 2004, the
Company is guarantor of an amount not to exceed $158,815 with $143,436
outstanding under these guarantees. The majority of the current
outstanding guarantees expire within the respective annual crop cycle.
The Company considers the risk of significant loss under these guarantees
and other contingencies to be remote, and the accrual recorded for exposure
under them was not material at June 30, 2004.
|
| |
On
August 21, 2001, the Company’s subsidiary in Brazil won a claim related
to certain excise taxes (“IPI credit bonus”) for the years 1983
through 1990 and is now pursuing collection. The collection procedures
are not clear and the total realization process could potentially be over
many years. The Company is unable to estimate the realizable value
of this claim as of June 30, 2004.
|
| |
Zimbabwe
remains in a period of civil unrest in combination with a deteriorating
economy. Should the current political situation continue, the Company
could experience disruptions and delays associated with its Zimbabwe operations.
If the political situation in Zimbabwe continues to deteriorate,
the Company’s ability to recover its assets there could be impaired.
The Company’s Zimbabwe subsidiary has long-lived assets of
approximately $38,646 as of June 30, 2004.
|
| |
|
|
7.
|
ISSUANCE OF SENIOR NOTES
AND BANK CREDIT FACILITY
|
|
|
|
| |
On May
30, 2003, the Company completed a private issuance of $125,000 principal
amount of 7 ¾% Senior Notes (the “7 ¾% Notes”) due
2013 pursuant to Rule 144A under the Securities Act of 1933, and issued
a redemption notice for all $125,000 of the outstanding 8 7/8% Senior
Notes due 2006. The financial covenants of the 7 ¾% Notes due
2013, are substantially similar to those for the other existing Senior
Notes, including restrictions on certain payments. Concurrent with
the completion of the 7 ¾% Senior Note issuance, the Company entered
into a derivative financial instrument to swap the entire $125,000 notional
amount to a floating interest rate equal to LIBOR plus 3.69%, set six
months in arrears. The effective rate at June 30, 2004 was 5.63%.
The 8 7/8% Senior Notes due 2006, were fully redeemed at June 30,
2003 at a price equal to the principal amount thereof plus 1.5%.
|
| |
On
October 27, 2003, the Company completed a new three-year $150,000 syndicated
bank credit facility with a group of seven banks. The credit facility
is subject to certain commitment fees and covenants that, among other
things, require the Company to maintain minimum working capital and tangible
net worth amounts, require specific liquidity and long-term solvency ratios,
including certain borrowing base restrictions, and restrict acquisitions.
The Company continuously monitors its compliance with these
covenants. The credit facility’s initial term expires on October
26, 2006, and, subject to approval by the lenders, may be extended. The
rates of interest are based on our published credit rating and vary according
to the type of loan requested by us. During the life of the agreement,
the interest rate could be the prime rate or the LIBOR rate adjusted.
The primary advance rate is the agent bank’s base lending rate, 4.25%
at March 31, 2004. The Company pays a commitment fee of 1% per annum
on any unused portion of the facility. The new facility replaced
a $165,000 facility.
|
| |
|
|
8.
|
DERIVATIVE FINANCIAL
INSTRUMENTS
|
|
|
|
| |
Fixed to Floating
Rate Interest Swaps
|
| |
Concurrent
with the issuance of $200,000 principal amount of 9 5/8% Senior Notes,
due 2011, on October 30, 2001, and $125,000 principal amount of 7 ¾%
Senior Notes, due 2013, on May 30, 2003, the Company entered into derivative
financial instruments to swap the entire notional amounts of the Senior
Notes to floating interest rates equal to LIBOR plus 4.25% and 3.69%,
respectively, set six months in arrears. The effective interest
rates at June 30, 2004 were 5.485% and 5.63% for the $200,000 and $125,000
issuances, respectively.
|
| |
The
maturity, payment dates, and other fundamental terms of these derivative
financial instruments match those of the related Senior Notes. In
accordance with SFAS No. 133, these derivatives qualify for hedge accounting
treatment. They are accounted for as fair value hedges. Changes
in the fair value of these derivative financial instruments, as well as
offsetting changes in the fair value of the Senior Notes, are being recognized
in current period earnings. As of June 30, 2004 and 2003 and March
31, 2004, the fair value of the debt increased (decreased) the Senior
Notes liability by $(10,002), $16,319 and $10,798, respectively, with
a corresponding change in the fair value of the derivative financial instruments
reflected in Other Long-Term Liabilities – Compensation and Other.
|
| |
|
|
|
-11-
|
| |
|
DIMON Incorporated and Subsidiaries
|
|
8.
| DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
|
| | |
| | Floating to Fixed Rate Interest Swaps
|
| | Prior to the implementation of SFAS No. 133, the Company entered into multiple interest swaps to convert a portion of its worldwide debt portfolio from floating to fixed interest rates, to reduce its exposure to interest rate volatility. At June 30, 2004, the Company held instruments of this type with an aggregate notional value of $245,000 bearing interest at rates between 4.985% and 6.22%, and with maturity dates ranging from August 23, 2005 to September 22, 2008. The implementation of SFAS No. 133 eliminated hedge accounting treatment for these instruments because they do not meet certain criteria. Accordingly, the Company is required to reflect the full amount of all changes in their fair value, without offset, in its current earnings. These fair value adjustments have caused substantial volatility in the Company’s reported earnings. I
n part to mitigate this volatility, the Company entered into a “mirror” swap effective April 1, 2004 with a notional amount of $100,000 and a June 1, 2006 maturity exactly matching that of a swap with a $125,000 notional value included in the aforementioned portfolio. This is a fixed-to-floating rate swap, which is expected to have periodic fair value adjustments that exactly offset those for the swap that it mirrors. Under the terms of the mirror swap, the Company receives interest at 2.285% and pays interest at six month LIBOR. For the three months ended June 30, 2004 and 2003, the Company recognized non-cash (income) expense before income taxes of $(6,131) and $2,038, respectively, from the change in fair value of these derivative financial instruments. With the recognition of each income or expense relating to these instruments, a corresponding amount is recognized in Other Long-Term Liabilities – Compensation and Other. At June 30, 2004, there was an aggregat
e credit of $15,231 million relating to these instruments accumulated in this balance sheet classification, all of which will reverse through future earnings over the remaining life of the instruments.
|
| | |
| | Forward Currency Contracts
|
| | The Company periodically enters into forward currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions. In accordance with SFAS No. 133, these derivatives qualify for hedge accounting treatment. They are accounted for as cash flow hedges. Changes in the fair value of these derivative financial instruments, net of deferred taxes, are recognized in Other Comprehensive Income and are included in earnings in the period in which earnings are affected by the hedged item.
|
| | |
| | Fair Value of Derivative Financial Instruments
|
| | In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company recognizes all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk(s). Cha
nges in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair values of derivatives not qualifying as hedges are reported in income.
|
| | The fair value estimates presented herein are based on quoted market prices.
|
| | During the three months ended June 30, 2004 and 2003, accumulated other comprehensive income decreased by $429, net of deferred taxes of $222 and increased by $48, net of deferred taxes of $22, respectively, due to the reclassification into earnings, primarily as cost of goods and services sold, due to the fulfillment of transactions. The remaining $1,713, net of tax of $843, at June 30, 2003 was due to the issuance of new cash flow hedges during the quarter.
|
| | |
9.
| PENSION AND POSTRETIREMENT BENEFITS
|
| |
| | In December 2003, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” which requires new interim disclosures relating to net periodic benefit cost and employer contributions to benefit plans.
|
| | |
| | Retirement Benefits
|
| | The Company has a Cash Balance Plan that provides retirement benefits for substantially all U.S. salaried personnel based on years of service rendered, age and compensation. The Company also maintains various other Excess Benefit and Supplemental Plans that provide additional benefits to (1) certain individuals whose compensation and the resulting benefits that would have actually been paid are limited by regulations imposed by the Internal Revenue Code and (2) certain individuals in key positions. The Company funds these plans in amounts consistent with the funding requirements of Federal Law and Regulations.
|
| | Additional non-U.S. plans sponsored by certain subsidiaries cover substantially all of the full-time employees located in Germany, Greece, Italy and Turkey.
|
| | |
| | -12-
|
|
|
|
DIMON Incorporated and
Subsidiaries
|
| |
| |
|
9.
|
PENSION AND POSTRETIREMENT
BENEFITS (Continued)
|
| |
Components
of Net Periodic Benefit Cost
|
| |
Net periodic
pension cost consisted of the following for the three months ended June
30, 2004 and 2003:
|
| |
|
| |
|
2004
|
|
2003
|
|
| |
Service cost
|
$ 776
|
|
$ 617
|
|
| |
Interest expense
|
1,074
|
|
1,073
|
|
| |
Expected return on plan
assets
|
(679)
|
|
(759)
|
|
| |
Amortization of prior
service cost
|
87
|
|
79
|
|
| |
Amortization of transition
amount
|
-
|
|
(63)
|
|
| |
Actuarial loss
|
187
|
|
62
|
|
| |
Net periodic pension
cost
|
$1,445
|
|
$1,009
|
|
| |
|
| |
Employer
Contributions
|
| |
The Company’s
investment objectives are to generate consistent total investment return
to pay anticipated plan benefits, while minimizing long-term costs. Financial
objectives underlying this policy include maintaining plan contributions
at a reasonable level relative to benefits provided and assuring that
unfunded obligations do not grow to a level to adversely affect the Company’s
financial health. As of June 30, 2004, no contributions were made
although the Company still anticipates making contributions of $550 to
its pension plans for fiscal 2005. However, this estimate is subject to
change, due primarily to asset performance significantly above or below
the assumed long-term rate of return on pension assets and significant
changes in interest rates.
|
| |
|
| |
Postretirement
Health and Life Insurance Benefits
|
| |
The Company
also provides certain health and life insurance benefits to retired U.S.
employees, and their eligible dependents, who meet specified age and service
requirements. Plan assets consist of paid-up life insurance policies
on certain current retirees. The Company retains the right, subject
to existing agreements, to modify or eliminate the medical benefits.
|
| |
|
| |
Components
of Net Periodic Benefit Cost
|
| |
Net periodic
pension cost consisted of the following for the three months ended June
30, 2004 and 2003:
|
| |
|
| |
|
2004
|
|
2003
|
|
| |
Service cost
|
$ 119
|
|
$ 85
|
|
| |
Interest expense
|
337
|
|
339
|
|
| |
Expected return on plan
assets
|
(1)
|
|
(1)
|
|
| |
Amortization of prior
service cost
|
(77)
|
|
(77)
|
|
| |
Actuarial loss
|
103
|
|
49
|
|
| |
Net periodic pension
cost
|
$ 481
|
|
$395
|
|
| |
|
|
10.
|
EXTRAORDINARY
ITEM
|
| |
|
| |
On May
1, 2003, the Company received $2,734 from the United Nations Compensation
Commission in connection with a claim filed by a predecessor company,
Monk-Austin, Incorporated. The claim arose from an uncollected trade
receivable from the Iraqi Tobacco Monopoly, which related to transactions
that occurred prior to Iraq’s invasion of Kuwait in August 1990.
The predecessor company charged off the entire receivable, net of
tax, as a $5,202 extraordinary loss during its fiscal year 1991. The
extraordinary gain of $1,777 is recorded net of tax of $957.
|
| |
|
-13-
|
| |
| |
The purchasing and processing activities of our business are seasonal. Our need for capital fluctuates and, at any one of several seasonal peaks, our outstanding indebtedness may be significantly greater or less than at year-end. We historically have needed capital in excess of cash flow from operations to finance inventory and accounts receivable. We also pre-finance tobacco crops in numerous foreign countries, including Argentina, Brazil, Greece, Guatemala, Malawi, Mexico, Tanzania and Turkey.
|
Our working capital decreased from $419.0 million at March 31, 2004 to $416.8 million at June 30, 2004. Our current ratio was 1.7 to 1 at June 30, 2004 compared to 1.9 to 1 at March 31, 2004. Our current ratio decrease results from an increase of $184.7 million in current assets and an increase in current liabilities of $186.9 million. Increases in current assets were due to increases in cash of $137.0 million and increased inventories and advances on purchases of tobacco of $121.9 million partially offset by decreases in accounts receivable of $72.7 million. Inventory increases primarily relate to new crop tobacco increases in Africa and South America. Increases in current liabilities are due to a $162.7 million increase in notes payable to banks and a $41.9 million increase in advances from customers partially offset by a $13.1
million decrease in accounts payable, a $2.5 million decrease in accrued expenses and a $2.3 million decrease in income taxes payable. The increases in notes payable to banks and advances from customers are primarily due to the cash requirements of the new tobacco crops in South America and Africa. Decreases in accounts payable relate primarily to the completion of the tobacco purchasing cycle in Europe.
|
Net cash used by operating activities was $14.4 million in 2004 compared to cash provided of $38.1 million in 2003. This change is primarily due to $103.8 million more cash used for inventories and advances on purchases of tobacco partially offset by $53.1 million more cash provided from changes in accounts receivable. The changes in inventories and advances relate to the higher current year crop sizes in Brazil and Argentina. The accounts receivable balances relate to decreased sales in 2004.
|
Net cash used by investing activities was $9.6 million in 2004 compared to $17.1 million in 2003. This decrease relates primarily to $9.9 million less cash used for purchases of property and equipment, a $5.0 million purchase in 2003 of a 25% interest in a non-tobacco company in North Carolina and $2.2 million more cash provided by sales of property and equipment partially offset by $7.6 million of long term tobacco supply related advances.
|
| |
-14-
|
| |
|
DIMON Incorporated and
Subsidiaries
|
|
|
|
|
|
LIQUIDITY AND CAPITAL
RESOURCES: (Continued)
|
| |
|
Net
cash provided by financing activities was $161.0 million in 2004 compared
to $48.3 million in 2003. This change is primarily due to an increase
in cash provided by short-term borrowings of $106.2 million, $4.4 million
less cash used for net long term debt repayments and $2.2 million less
cash used for debt issuance costs. The changes in short-term borrowings
relate to the financing of larger Brazilian and Argentine crops. Debt
issuance costs relate to the 2003 redemption of senior notes due in 2006
and issuance of new notes due in 2013.
|
|
At
June 30, 2004 we had seasonally adjusted lines of credit of $636.5 million
of which $406.4 million was outstanding with a weighted average interest
rate of 3.08%. Unused short-term lines of credit amounted to $188.6
million. At June 30, 2004 we had $31.8 million letters of credit
outstanding and an additional $9.7 million of letters of credit lines
available. Total maximum borrowings, excluding the long term credit
agreements, during the quarter were $527.5 million.
|
|
Cash
dividends paid to stockholders during the quarter were $0.075 per common
share.
|
|
On
October 30, 2001, we issued $200 million principal amount of 9 5/8% Senior
Notes due 2011. The proceeds of this Note issuance were used to
repay certain existing indebtedness, including all amounts drawn under
our $250 million syndicated credit facility then existing. Concurrent
with the completion of the Note issuance, we entered into a derivative
financial instrument to swap the entire $200 million notional amount to
a floating interest rate equal to LIBOR plus 4.25%, set six months in
arrears. The effective rate at June 30, 2004 was 5.485%.
|
|
On
May 30, 2003, we issued $125 million principal amount of 7 3/4% Senior
Notes due 2013. The proceeds of this Note issuance were used to
redeem in full $125 million of our outstanding 8 7/8% Senior Notes due
2006. Concurrent with the completion of the Note issuance,
we entered into a derivative financial instrument to swap the entire $125
million notional amount to a floating interest rate equal to LIBOR plus
3.69%, set six months in arrears. The effective rate at June 30,
2004 was 5.63%. The existing 8 7/8% Senior Notes due 2006 were fully
redeemed at June 30, 2003.
|
|
On
October 27, 2003, we completed a new three-year $150 million syndicated
bank credit facility with a group of seven banks. The credit facility
is subject to certain commitment fees and covenants that, among other
things, require us to maintain minimum working capital and tangible net
worth amounts, require specific liquidity and long-term solvency ratios,
including certain borrowing base restrictions, and restrict acquisitions.
We continuously monitor our compliance with these covenants. The
credit facility’s initial term expires on October 26, 2006, and,
subject to approval by the lenders, may be extended. The rates of interest
are based on our published credit rating and vary according to the type
of loan requested by us. During the life of the agreement, the interest
rate could be the prime rate or the LIBOR rate adjusted. The primary advance
rate is the agent bank’s base lending rate, 4.25% at June 30, 2004.
We pay a commitment fee of 1% per annum on any unused portion of
the facility. The new facility replaced a $165 million facility.
|
|
We
have historically financed our operations through a combination of short-term
lines of credit, revolving credit arrangements, long-term debt securities,
customer advances and cash from operations. At June 30, 2004, we
had no material capital expenditure commitments. We believe that
these sources of funds will be sufficient to fund our anticipated needs
for fiscal year 2005. There can be no assurance, however, that these
sources of capital will be available in the future or, if available, that
any such sources will be available on favorable terms.
|
| |
|
-15-
|
|
|
| | Three Months Ended June 30,
| |
(in millions)
|
2004
| Increase/
(Decrease)
|
2003
| |
Sales and other operating revenues
| $299.7
| $(64.8)
| $364.5
| |
Gross profit
| 53.3
| (15.5)
| 68.8
| |
Selling, administrative and general expenses
| 30.0
| (8.3)
| 38.3
| |
Other income
| (1.9)
| (1.9)
| -
| |
Restructuring and asset impairment charges
| 0.7
| 0.7
| -
| |
Interest expense
| 12.1
| (0.5)
| 12.6
| |
Interest income
| 0.9
| 0.4
| 0.5
| |
Derivative financial instruments (income)/expense
| (6.1)
| (8.1)
| 2.0
| |
Income taxes
| 6.4
| 1.5
| 4.9
| |
Equity in net income of investee companies
| 0.1
| (0.4)
| 0.5
| |
Minority interests (income)
| (0.2)
| 0.1
| (0.3)
| |
Extraordinary item – Iraqi receivable recovery, net of $1.0 income tax
| -
| (1.8)
| 1.8
| |
Net Income
| $ 13.4 *
| $ (0.7)*
| $ 14.1
| |
| | | | |
* Amounts do not equal column totals due to rounding.
| | | | |
|
|
|
DIMON Incorporated and
Subsidiaries
|
|
|
|
|
|
RESULTS OF OPERATIONS:
(Continued)
|
|
|
|
Three
Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
(Continued)
|
| |
|
Gross
profit as a percentage of sales decreased to 17.8% in 2004 compared
to 18.9% in 2003. Our gross profit decreased $15.5 million to $53.3
million in 2004 compared to $68.8 million in 2003. The gross profit decrease
was primarily due to the aforementioned sales volume reductions as well
as additional lower of cost or market adjustments of $2.2 million primarily
due to the additional impact of unfavorable growing conditions in northern
Brazil.
|
|
|
|
Selling,
administrative and general expenses decreased $8.3 million or 21.7%
from $38.3 million in 2003 to $30.0 million in 2004. This decrease
is primarily due to the recognition of $6.0 million in settlement of the
DeLoach class action lawsuit in 2003. Decreases were also attributable
to higher 2003 retirement plan charges.
|
|
|
|
Other
income of $1.9 million in 2004 includes gains on sales of fixed assets
and insurance recoveries on fixed assets.
|
| |
|
Restructuring and
asset impairment charges were $0.7 million in 2004 and were primarily
related to severance charges of our North American operations.
|
|
|
|
Interest
expense decreased $0.5 million from $12.6 million in 2003 to $12.1
million in 2004. This decrease relates primarily to lower average
rates partially offset by higher average borrowings.
|
|
|
|
Derivative
financial instruments resulted in a $6.1 million benefit in 2004 compared
to a $2.0 million charge in 2003. The charge or benefit relates
to the changes in fair value of non-qualifying interest rate swap agreements.
|
|
|
|
Effective
tax rates of 33% in 2004 and 30% in 2003 relate primarily to the distribution
of taxable income among various taxing jurisdictions.
|
|
|
|
Extraordinary
Item – On May 1, 2003, we received $2.7 million from the United
Nations Compensation Commission in connection with a claim filed by a
predecessor company, Monk-Austin, Incorporated. The claim arose
from an uncollected trade receivable from the Iraqi Tobacco Monopoly,
which related to transactions that occurred prior to Iraq’s invasion
of Kuwait in August 1990. The extraordinary gain of $1.8 million
is recorded net of tax of $0.9 million.
|
| |
|
OUTLOOK AND OTHER
INFORMATION:
|
|
|
|
We believe
that the global supply and demand for leaf tobacco continues to be substantially
balanced. However, there are indications that production forecasts,
if achieved, could exceed global customer demand. In addition, notable
significant tobacco production volume reductions continue in both the
United States and Zimbabwe. These reductions, as well as anticipated
future reductions in Western Europe, have created a shift in the sourcing
of customer requirements primarily to Argentina, Brazil, Asia and certain
African countries other than Zimbabwe. This has and will continue
to impact the ongoing requirements of our organizational structure and
asset base. Reduced levels of imports into Brazil continue to result
in a shortage of shipping containers and vessels available for tobacco
and other exports. These shipping delays may continue to impact
the timing of shipments between quarters in fiscal 2005.
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We will
continue to focus on regions of the world that are growing in market importance
in an effort to achieve profitable financial results. We believe
that the restructuring plans should position us to better capitalize on
anticipated larger crops in South America, and allow us to focus on delivering
outstanding customer service, exercise expense discipline and maintain
a strong balance sheet over the long term. Although we are optimistic
about the longer-term effects of our restructuring plans, it is too early
to quantify the benefits that facility consolidation and strategic sourcing
will have on our cost structure.
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-17-
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DIMON Incorporated and
Subsidiaries
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FACTORS THAT MAY AFFECT
FUTURE RESULTS:
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Readers
are cautioned that the statements contained herein regarding expectations
for our performance are “forward-looking statements” as defined
in the Private Securities Litigation Reform Act of 1995. These statements
are based on current expectations of future events. If underlying assumptions
prove inaccurate or unknown risks or uncertainties materialize, actual
results could vary materially from our expectations and projections. Risks
and uncertainties include changes in the timing of anticipated shipments,
changes in anticipated geographic product sourcing, political instability
in sourcing locations, currency and interest rate fluctuations, shifts
in the global supply and demand position for our tobacco products, and
the impact of regulation and litigation on our customers. A further
list and description of these risks, uncertainties and other factors can
be found in our Annual Report on Form 10-K for the fiscal year ended March
31, 2004 and other filings with the Securities and Exchange Commission.
We assume no obligation to update any forward-looking statements
as a result of new information or future events or developments, except
as required by law.
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Item 3. Quantitative
and Qualitative Disclosures about Market Risk
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Derivatives
Policies: Hedging interest rate exposure using swaps and hedging foreign
exchange exposure using forward contracts are specifically contemplated
to manage risk in keeping with management’s policies. We may use
derivative instruments, such as swaps or forwards, which are based directly
or indirectly upon interest rates and currencies to manage and reduce
the risks inherent in interest rate and currency fluctuations.
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We
do not utilize derivatives for speculative purposes, and we do not enter
into market risk sensitive instruments for trading purposes. Derivatives
are transaction specific so that a specific debt instrument, contract,
or invoice determines the amount, maturity, and other specifics of the
hedge.
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Foreign
exchange rates: Our business is generally conducted in U.S. dollars,
as is the business of the tobacco industry as a whole. However,
local country operating costs, including the purchasing and processing
costs for tobaccos, are subject to the effects of exchange fluctuations
of the local currency against the U.S. dollar. We attempt to minimize
such currency risks by matching the timing of our working capital borrowing
needs against the tobacco purchasing and processing funds requirements
in the currency of the country where the tobacco is grown. Also,
in some cases, our sales pricing arrangements with our customers allow
adjustments for the effect of currency exchange fluctuations on local
purchasing and processing costs. Fluctuations in the value of foreign
currencies can significantly affect our operating results. We have
recognized exchange gains (losses) in our statements of income of $1.1
million and $(1.6) million for the three months ended June 30, 2004 and
2003, respectively.
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Our
consolidated selling, administrative and general expenses denominated
in foreign currencies are subject to translation risks from currency exchange
fluctuations. These foreign denominated expenses are primarily denominated
in the euro, sterling and Brazilian real.
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Interest
rates: We manage our exposure to interest rate risk through the proportion
of fixed rate and variable rate debt in our total debt portfolio. A
substantial portion of our borrowings are denominated in U.S. dollars
and bear interest at commonly quoted rates.
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Item 4. Controls
and Procedures
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As of June
30, 2004, an evaluation was carried out under the supervision and with
the participation of the Company’s management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures, as defined in Rule 13a-15 under
the Securities Exchange Act (the Act). Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports we file
under the Act is recorded, processed, summarized, and reported by management
of the Company on a timely basis in order to comply with the Company’s
disclosure obligations under the Act and the Securities and Exchange Commission
(SEC) rules thereunder.
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-18-
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DIMON Incorporated and Subsidiaries
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Item 4. Controls and Procedures (Continued)
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Internal Control over Financial Reporting
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In connection with the fiscal year ended March 31, 2004, management, in consultation with Ernst & Young LLP (E&Y), the Company’s independent auditors, identified and reported to the Audit Committee of the Board of Directors, certain matters involving internal control deficiencies considered to be “significant deficiencies” under the standards established by the American Institute of Certified Public Accountants (“AICPA”) and the SEC. E&Y has reported to the Audit Committee that none of the deficiencies is believed to be a material weakness. These deficiencies related to (a) internal controls to properly identify, classify and report cash payments and to prevent potentially improper payments (relating to the facts discussed in Note 6); (b) internal controls to properly report insurance expense; and (c) internal controls to monitor financial reporting over less significant foreign
locations.
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The Company has taken, and is continuing to implement, certain remedial measures with respect to these internal control deficiencies, including but not limited to (a) the closing of certain bank accounts with insufficient controls in certain foreign jurisdictions; (b) certain personnel changes including the addition of new finance and internal audit staff in Europe; (c) the enhancement of existing training programs; (d) the improvement of procedures for the review and reporting of insurance expense; (e) the reinforcement of compliance with existing processes and procedures relating to the financial statement close process; (f) expansion and enhancement of the periodic review process by the Company's financial and accounting personnel; and (g) other measures designed to prevent similar situations in the future.
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Part II. Other Information
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Item 1. Legal Proceedings
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In October 2001, the Directorate General for Competition (DGCOMP) of the European Commission (EC) began conducting an administrative investigation into certain tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in Spain and Italy. We believe that the DGCOMP may be conducting similar investigations in other countries. Our subsidiaries in Spain (Agroexpansion) and Italy (DIMON Italia) are cooperating with the DGCOMP. Based on our understanding of the facts pertaining to the activities of Spanish and Italian tobacco processors, including Agroexpansion and DIMON Italia, respectively, we believe there have been infringements of EU law. Agroexpansion and DIMON Italia believe that there are mitigating circumstances in the structure and traditional operation of tobacco production and processing in these markets. In December 2003 and February 2004, the
EC issued Statements of Objections (“the Statements”) relating to buying practices in Spain and Italy, respectively. The Statements allege that the buying practices of the tobacco processors and producers in Spain and Italy constitute infringements of EU competition laws. The Statements indicated that the EC intends to assess administrative penalties, but did not provide any indication as to what those penalties may be. Both Agroexpansion and DIMON Italia have filed a response to the Statements of Objections relating to Spain and Italy, respectively. The EU conducted oral hearings on the Spanish matter and the Italian matter during March and June, 2004, respectively. Although it is impossible to assess the amount of any penalties at this time, they could be material to our financial condition or results of operations. We believe that the cooperation of our subsidiaries with the DGCOMP during its investigations could result in a reduction of the amount of any penalties
that otherwise could be imposed.
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In March 2004, we discovered potential irregularities with respect to certain bank accounts in two countries in southern Europe and central Asia. Our Audit Committee of the Board of Directors engaged an outside law firm to conduct an investigation of activity relating to these accounts. That investigation revealed that, although the amounts involved were not material and had no material impact on our historical financial statements, there have been payments from these accounts that may have violated the U.S. Foreign Corrupt Practices Act. We voluntarily reported the payments to the appropriate U.S. authorities. We have closed the accounts in question and are implementing personnel changes and other measures designed to prevent similar situations in the future, including the addition of new finance and internal audit staff in Europe and enhancement of existing training programs.
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If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, they may seek to impose sanctions on us that may include injunctive relief, disgorgement, fines, penalties and modifications to business practices. It is not possible to predict at this time whether the authorities will determine that violations have occurred, and if they do, what sanctions they might seek to impose. It is also not possible to predict how the government’s investigation or any resulting sanctions may impact our business, results of operations or financial performance, although any monetary penalty assessed may be material to our results of operations in the quarter in which it is imposed. We will continue to cooperate with the authorities in these matters.
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-19-
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DIMON Incorporated and
Subsidiaries
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Item 2. Changes
in Securities and Use of Proceeds
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None.
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Item 3. Defaults
Upon Senior Securities
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None.
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Item 4. Submission
of Matters to a Vote of Security Holders
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None.
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Item 5. Other
Information
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None.
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Item 6. Exhibits
and Reports on Form 8-K
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(a)
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Exhibits
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See Index of Exhibits
after Signature Page
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(b)
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Current Reports on Form
8-K
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April 1, 2004 –
Item 7 and 11, Temporary Suspension of Trading Under Registrant’s
Employee Benefit Plan.
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May 24, 2004 – Item
12, DIMON Announces Arrangements for Release of Financial Results
Company Lowers Fiscal 2004 Guidance
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May 25, 2004 - Item 7,
DIMON Announces Quarterly Dividend and Item 9, Regulation FD Disclosure
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June 10, 2004 –
Item 12, DIMON Reports Financial Results for Shortened Fiscal Year 2004
Company Provides Fiscal 2005 Guidance.
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-20-
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